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Fourth-Down Investing

Is it time to go deep?

Football is more than just a game of Xs and Os. It's about more than just brute strength and physical finesse. It's also a thinking game. There's a reason why there are coaches on the sidelines -- they're thinking their way to victory by outsmarting their opponents.

Yes, it's about more than just hurling the pigskin. It's about creating advantages. Shotgun formations were devised to give quarterbacks more time to survey the field. Screen passes keep blitzing linebackers honest. No-huddles were introduced to save precious clock ticks as well as to keep defenses off balance.

Sometimes, the advantages go too far. You've got steroids, of course, but what about offensive linemen who try to get by with holding and chop-blocking when they're out of sight of the officials? Am I the only one whose early recollections of football involve Jack Tatum and Lester Hayes of the Oakland Raiders covered in Stickum? That was a sticky substance cornerbacks would lather on to aid in interceptions -- and it was ultimately banned by the league.

Lucky you, though. There's no zebra-striped referee looking to throw a flag if you take certain investing advantages in the market. As long as it's not illegal, you can make sure that you have that extra advantage over the market's masses. You are, after all, the coach of your own portfolio.

You didn't think you had an advantage in the big, bad Wall Street gridiron? You bet you do. Let me walk you through four quick plays that will make you a market-crushing investor.

First down: Buy what you knowIt seems like obvious advice, but let's take it through some drills. Where do you live? What industry do you work in? What are your hobbies?

If you live in Atlanta, don't you think you would have an advantage in following Coca-Cola(NYSE:KO)? Company news is local news. New product introduction may be taking place in your back yard. You may even know a mid-level executive or two.

If you work in online marketing, how can you not be one leg up on everybody else in picking apart Google(NASDAQ:GOOG)? You see the trends. You understand the relevance of new features.

If you love video games, I think your chances are better than fair in analyzing Electronic Arts(NASDAQ:ERTS), better than some Wall Street spreadsheet-cruncher who's never played Need for Speed or can't tell the difference between the annual installments of the Madden football franchise.

This isn't just talk. When I made my first recommendation for the Motley Fool Rule Breakers newsletter service, I wanted to stick to a company I felt I knew better -- a lot better -- than the average investor. Despite the allure of glitzier possibilities, I ultimately went with Steiner Leisure(NASDAQ:STNR). It's a local company. Traveling on cruise ships is a passion of mine, so I knew all about its lucrative floating spa business and the enviable moat that no one else seemed to respect.

It has worked out great. The stock has gone on to nearly double since it was singled out two years ago.

Second down: Hit 'em where they ain'tAm I crossing the line by throwing Wee Willie Keeler's baseball axiom into a football-related piece? I have to. It's all too true in the stock market. There are distinct advantages to cutting against the grain. Value investors would call it contrarian investing. For a growth stock investor like me, it's simply a matter of being an early adopter.

David Gardner relishes embracing the misunderstood. He did that through the 1990s in the real-money Rule Breaker portfolio. He's doing that today, leading me and other analysts in seeking out the companies that will matter more in the future.

When David embraced eBay(NASDAQ:EBAY) in the 1990s and Intuitive Surgical(NASDAQ:ISRG) last year, he did so by standing up to skeptics. Can a virtual flea market really be worth billions? Will surgeons warm up to robotic surgical arms? The answers are pretty obvious now. EBay is the master enabler of consumer-to-consumer transactions, and Intuitive's da Vinci arm has revolutionized the way hospital operating rooms are run.

This doesn't mean you should jump in an ocean loaded with sharks, but don't immediately dismiss a company for any of the following reasons:

High short interest ratio

Lack of analyst buy ratings

Critics pegging the shares as "overvalued"

Are their reasons for being skittish valid? If not, you may grow to appreciate the dissent as potential buying power down the road. As long as you know what you're getting yourself into, relish the opportunity to be fashionably early.

Third down: Look all around you to avoid getting sackedBlitzing defenders love to blindside quarterbacks. Keeping abreast of everything taking place around you is one way to avoid being taken down for a loss.

In market terms, just because you've bought a company doesn't mean you can brush it off to the side and ignore it until you need the money. There are plenty of things that can happen to the company -- and perhaps more importantly, to its competitors -- that can make things better or worse for your stock.

Tracking every single intraday trade? That's a waste of time. Staying on your toes for quarterly reports, company news, and competitor announcements is more like it.

Perpetually assessing your portfolio will help you avoid as many implosions as possible. It will also help you identify opportunities within your actual holdings. Too many investors feel that new money should go to new stocks, when your best investment may be simply duplicating your last one.

Fourth down: There is no fourth downIf you've played it right, you should never get to that final down. Fourth-down investing is about executing your first three plays flawlessly so you don't have to ponder whether to punt or go for broke.

Getting it right early is the key to sustainable drives and ultimate scores. That's the mindset behind the Rule Breakers growth stock newsletter.

Rule Breakers newsletter research team memberRick Munarrizhas been playing fantasy football for a dozen years now. He does not own shares in any of the companies in this story. Intuitive Surgical and Steiner Leisure are Rule Breakers recommendations. Coca-Cola is an Inside Value pick. Electronic Arts and eBay are Stock Advisor selections. The Fool has a disclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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